Inventory turnover calculator: how fast does your stock sell?
Inventory turnover measures how many times a business sells and replaces its average stock in a period: cost of goods sold divided by average inventory. With cost of goods sold of 600,000 and average inventory of 100,000, turnover is 6 times a year, so stock sits about 61 days before it is sold.
Calculate inventory turnover and days in stock
For the period, from the income statement
Results
- Inventory turnover
- 6 times
- Days inventory outstanding
- 60.8 days
- Average inventory
- 100,000.00
Average number of days an item stays in stock before it is sold.
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Inventory turnover formula
Turnover compares what you sold, at cost, with what you typically held. Both sides are measured at cost so the ratio is not inflated by your markup.
- Average inventory
- Average inventory = (Opening + Closing) / 2
- Inventory turnover
- Turnover = Cost of goods sold / Average inventory
- Days inventory outstanding
- DIO = Days in period / Turnover
- Same thing, other way
- DIO = Average inventory / COGS × Days in period
Use 365 days for a year, 90 for a quarter or 30 for a month. Annualise monthly figures before comparing them with yearly benchmarks.
Worked example: a hardware store
A hardware store starts the year with 80,000 of stock at cost and ends it with 120,000. Its income statement shows cost of goods sold of 600,000.
Average inventory is (80,000 + 120,000) / 2 = 100,000. Turnover is 600,000 / 100,000 = 6 times, and days inventory outstanding is 365 / 6 = 60.8 days. If the store could run with an average of 75,000 in stock for the same sales, turnover would rise to 8 and 25,000 of cash would be freed.
| Average inventory | Cost of goods sold | Turnover | Days in stock |
|---|---|---|---|
| 150,000 | 600,000 | 4.0 | 91.3 |
| 100,000 | 600,000 | 6.0 | 60.8 |
| 75,000 | 600,000 | 8.0 | 45.6 |
| 50,000 | 600,000 | 12.0 | 30.4 |
Assumptions behind the result
- Inventory and cost of goods sold are both measured at cost, using the same valuation method (FIFO or weighted average).
- The simple average of opening and closing balances represents the stock you held during the period. For seasonal businesses, average the 12 month-end balances instead.
- The period is the same for both figures: a full year of cost of goods sold against stock balances from that year.
- Write-downs to net realisable value are already reflected in the closing balance.
What is a good inventory turnover ratio?
A good turnover is one that is in line with your industry and improving over time. Grocery and fresh food businesses turn stock 12 to 20 times a year or more, general retailers often 4 to 8 times, and heavy machinery or jewellery businesses 2 to 4 times.
Compare yourself with your own history first. A falling ratio means stock is piling up faster than sales, which ties up cash and raises the risk of obsolete items. A very high ratio can mean lean operations, or frequent stockouts that cost you sales.
Why use cost of goods sold and not sales?
Inventory sits on the balance sheet at cost, so the numerator should be at cost too. Dividing sales by inventory mixes selling prices with cost prices and makes a high-margin business look faster than it is.
Some data providers still publish sales-based turnover. When you benchmark, check which definition they used before you compare.
How to improve inventory turnover
Faster turnover usually comes from buying closer to demand rather than from cutting stock across the board.
- Review slow movers with an ageing report and clear items that have not sold in 180 days.
- Order smaller quantities more often where the ordering cost allows it; the EOQ calculator shows the trade-off.
- Set reorder points from real lead times instead of habit.
- Track turnover per item or category, not only in total, because a few dead lines can hide behind a healthy average.
How to calculate inventory turnover
- 1
Take cost of goods sold
Read cost of goods sold for the period from the income statement.
- 2
Find opening and closing inventory
Take the inventory balance at the start and at the end of the same period from the balance sheet.
- 3
Average the balances
Add opening and closing inventory and divide by 2, or average the month-end balances for seasonal stock.
- 4
Divide
Divide cost of goods sold by average inventory to get turnover.
- 5
Convert to days
Divide the number of days in the period by turnover to get days inventory outstanding.
Frequently asked questions
What does an inventory turnover of 5 mean?
The business sold and replaced its average stock five times during the year. In days, each item sat in stock for about 365 / 5 = 73 days on average before it was sold.
Is a higher inventory turnover always better?
Not always. Higher turnover frees cash and reduces obsolescence, but if it comes from running too lean you lose sales to stockouts and pay more for rush orders. Look at it together with gross margin and fill rate.
What is the difference between inventory turnover and days inventory outstanding?
They measure the same thing in different units. Turnover counts how many times stock is sold in a period; days inventory outstanding converts that into the average number of days stock is held. DIO = days in period / turnover.
Should I use average inventory or closing inventory?
Use average inventory. Closing inventory alone can be unusually high or low on the balance sheet date, for example after a big delivery, and would distort the ratio.
How does inventory turnover relate to the cash conversion cycle?
Days inventory outstanding is the first part of the cash conversion cycle. Add days sales outstanding and subtract days payables outstanding to get the full cycle; the cash conversion cycle calculator does it for you.
Related pages
More free calculators
All free tools- EOQ calculatorThe order size that minimises ordering plus holding costs, with orders per year and a reorder point.
- FIFO vs weighted average calculatorCost of goods sold and ending inventory under FIFO and weighted average, side by side.
- Break-even calculatorUnits and sales you need to cover fixed costs, plus target profit volume and margin of safety.
- VAT calculatorAdd VAT to a net price or extract it from a gross amount, at any rate.
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